Sally Beauty Holdings Inc (SBH) 2009 Q4 法說會逐字稿

Welcome to the Sally Beauty Holdings fiscal 2009 fourth quarter and full-year earnings call. (Operator Instructions).

I would now like to turn the conference over to our host, Ms. Karen Fugate, Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, I would like to remind that you certain comments including comments on matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of section 21-E of the Securities Exchange Act of 1934.

Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings SEC filings including its most recent annual report on Form 10-K being filed today.

The Company does not undertake any obligations to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliations of suggesting items, in non-GAAP financial measures in its earnings press release and on its web site.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer, and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Gary.

Thank you, Karen. Good morning, everyone. Thank you for joining us for our fiscal 2009, fourth quarter and full-year earnings call. I will begin today's discussion with a high-level review of our full year financial results followed by a review of our business initiatives. Mark will then take you through the 2009 fourth quarter in more detail.

As you saw from our press release this morning, we delivered very good fourth quarter and full-year results, despite a difficult recessionary environment. We executed on all our strategic objectives including a 3.7% growth in our store base achieved through both organic openings and acquisitions. We also strengthened our balance sheet through a $73 million reduction in long-term debt. For the fiscal year 2009, we reported consolidated net sales of $2.6 billion, down 0.4% from last year primarily due to the unfavorable foreign currency exchange impact of 3.2% of sales.

Consolidated same-store sales remained positive all year and grew 1.8% for the full-year. Gross profit margin for the year improved 60 basis points to 47.2%. Adjusted net earnings grew 19.2% to $96 million, resulted in adjusted earnings per share of $0.52. GAAP net earnings were $99.1 million, up 27.8% over last year, with earnings per share of $0.54.

Fiscal 2009 operating margin improved 60 basis points to 11.3%, primarily driven by lower SG&A expense, and improved gross profit margins. Fiscal 2009 adjusted EBITDA was $352.5 million, an increase of 3.2% from fiscal 2008. This increase is primarily due to growth in operating earnings driven by gross margin improvement.

Year-end total store count was 3,914 an increase of 3.7%, or 141 stores. Store growth from acquisitions was 1.7%, and organic growth represented 2%. If you recall, earlier in the year, we lowered our organic growth projection in light of the declining economy. In hindsight, we were probably too conservative in pulling back on new openings given that our business remains stable through the worst of the economic crisis, as has been our history. However, in fiscal year 2010, we believe we can return to our historical organic growth rate of 4% to 5%.

In addition to organic expansion, we will continue to look for strategic and synergistic acquisitions both domestically and internationally. We generated $223.3 million of net cash through operating activities in fiscal year 2009. Our use of cash was balanced, and in-line with our strategic objectives. We used approximately $73 million to pay down long-term debt, approximately $82 million on strategic acquisitions, and roughly $38 million on capital expenditures, including new store openings. We ended the fiscal year with a solid liquidity position. Our cash and cash equivalents at year-end were $54.4 million and we had $326 million of borrowing capacity with a zero balance on our revolver.

Turning to the segments full-year performance, same-store sales for Sally Beauty Supply grew 2.1%. Net sales growth was 1.4% which includes the impact from unfavorable foreign currency exchange, of $64 million or 3.8% of sales. Gross margin improved by 50 basis points. However, operating margin declined by 40 basis points.

Sally's operating profits were dampened by underperformance in the UK. Although the weak economy in the UK is having an impact on our business, we launched operational improvement initiatives such as optimizing our merchandising strategy, implementing assisted replenishment and rationalizing our stores and warehouses. During the course of the year we made progress towards these initiatives and by the fourth quarter realized significant improvement on both the top and bottom line in the UK.

On the marketing side for Sally Beauty, we continued to realize positive trends from our customer acquisition strategy. The average sale for a Beauty Club Card customer is consistently higher than the average for a noncard customer. Beauty Club memberships are up over 30% from a year-ago, and contributed to our growth and store traffic.

During the fourth quarter, we established a presence in South America through our acquisition of Intersalon, a beauty supply distributor headquartered in Santiago, Chile. Intersalon currently has 16 stores that sell professional, private label, open line, and exclusive brands. We believe South America is a good market place for us, and we expect to be acquisitive in the region.

Our BSG segment has same store sales of 1%. Net sales were $940.9 million, down 3.5% in part due to unfavorable foreign currency exchange impact of $21.9 million or 2.2% of sales. We also experienced softness in the franchise and sales consultant businesses, representing 1.3% and 2% of sales, respectively. BSG's gross profit margin was 38.7%, a 10 basis point improvement over last year. BSG did a terrific job in leveraging their cost structure, and improved full-year operating margins 140 basis points, to reach 9.7%. SG&A expense reductions and approximately $8 million in warehouse optimization savings were the primary contributors to this margin expansion.

In September, BSG made two acquisitions that directly support our strategy of extending our distribution reach in important geographic regions. BSG made its entrance into Puerto Rico through its acquisition of Belleza Concepts International. Belleza has three stores and eight sales consultants operating in the Caribbean.

The acquisition of Pennsylvania based Schoeneman Beauty Supply extended the BSG distribution reach in the Northeast. Schoeneman has a direct sales force and 43 professional only stores located in Pennsylvania, some in New Jersey, northern Delaware and West Virginia. Our strategy at BSG remains the same. To continue store expansion both organically and through acquisitions, to increase our footprint in existing geographies and new territories.

So, in summary, we executed well across the Company and posted solid financial results in a very difficult economy. Once, again, demonstrating the recession resistant nature of our business.

Now, Mark will provide more financial detail for the fourth quarter. Mark?

Thanks, Gary. Consolidated net sales for the fourth quarter increased 60 basis points to $676 million. This increase was principally driven by same-store sales growth of 2.4% and revenue growth from new store openings. Unfavorable foreign currency exchange impact of $13 million or 2% of sales partially offset our sales growth.

Gross margins in the fourth quarter improved 50 basis points to 47.3%, over the fiscal 2008 fourth quarter. Gross margin improvement was driven by both operating segments through favorable product and customer mix, as well as low-cost sourcing.

Fourth quarter SG&A expenses were $232 million, or 34.2% of sales, a 10 basis point improvement from the 34.3% in the year-ago quarter.

Unallocated corporate expenses including share-based compensation, was $78.6 million, a $5 million decrease over the prior year due to lower professional fees, administrative costs and share-based compensation expense. For fiscal 2010, we anticipate unallocated corporate expenses to increase higher due to - - higher share-based compensation expense, investments in IT and international expansion. Unallocated corporate overhead including $10 million in share-base compensation are expected to be in the range of $85 million to $90 million in 2010.

Consolidated operating earnings in the fourth quarter increased 7.3% to reach $76 million. Operating margin was up 70 basis points to 11.3%. The fourth quarter performance was primarily driven by cost reductions in BSG, improvement in gross margins and lower depreciation and amortization.

Interest expense net of interest income for the fourth quarter was $29.3 million and it included $3.6 million of noncash income related to our interest rate swap transactions. Interest expense declined $6 million over last year's quarter, primarily due to lower rates on our loan facility. As a reminder, our interest rate swap agreements with notional amount of $350 million do not qualify for hedge accounting treatment and will expire later this month. The remaining swap liability of approximately $2.4 million will be taken during the first quarter of fiscal 2010.

Our adjusted net earnings were $24.8 million, a 22.8% increase from the year-ago quarter. Adjusted net earnings per share was $0.14 after adjusting for a noncash interest income of $2.2 million, net of tax, from the mark-to-market changes in the fair value of our interest rate swaps.

On a GAAP basis, net earnings for the fiscal 2009 fourth quarter, were $27 million, an increase of 25.6%, with diluted earnings per share of $0.15. Adjusted EBITDA for the fourth quarter was $90.1 million. A 5.3% increase compared to $85.6 million in the prior year quarter. This increase was primarily due to lower expenses and higher gross margin.

Turning to the business segments, Sally Beauty's net sales for the fourth quarter were $438 million, an increase of 2%. Sales growth was driven by same store sales of 3.1% in new store openings. Unfavorable foreign currency exchange rates and softness in the UK partially offset sales growth. Gross profit for the quarter increased $4.9 million or 2.2% over the year-ago quarter with a gross margin of 51.7%, a 10 basis point improvement. Favorable customer products mix contributed to the margin expansion.

The Sally segment report fourth quarter operating earnings of $71 million. Operating margins were 16.3% of sales, down from 17% in the year-ago quarter. The decrease in operating margins was primarily a result of higher advertising and promotions related to our CRM initiatives and higher mix of lower margin international business.

Turning to the BSG business, fourth quarter net sales were $238 million, down 2% from the prior year with same-store sales up 40 basis points. Unfavorable foreign currency exchange and softness in our franchise and sales consultant business negatively impacted sales growth.

Gross margins for BSG in the fourth quarter were 39.3%, an increase of 80 basis points. This margin expansion was primarily due to a shift in sales and product mix. Segment operating earnings for BSG in the fourth quarter increased 26.1% to $25.4 million. Operating margins strengthened to 10.7%, a 240 basis point improvement from the year-ago quarter.

Operating improvements throughout the year reflect BSG's efforts to reduce costs and streamline the business. The warehouse optimization project we completed resulted in a savings this year of approximately $8 million. We expect to gain an incremental $2 million in savings in fiscal 2010.

And looking at the balance sheet, cash and cash equivalents at September 30, 2009 were $54 million. Inventories improved by $38.5 million over September 30, 2008, and included $13 million of inventories from acquisitions. Capital expenditures for $37.3 million for fiscal 2009. Capital expenditures were lower than fiscal 2008, primarily due to scaling back on new-store openings and the completion of the warehouse optimization project.

For 2010, we expect capital expenditures to be back in the range of $45 million to $50 million. We ended the year with approximately $326 million in borrowing capacity on our AVL facility with no outstanding borrowings. On October 2, Moody's rating agency upgraded their outlook on Sally Beauty Holdings from negative to stable and upgraded our term loan rating to B1.

As of September 30, 2009, our debt excluding capital leases, totaled approximately $1.7 billion. During fiscal 2009, we paid down $73 million of long-term debt. Our consolidated coverage ratio as of the fiscal year-end was 4.5 times. Since we acquired this debt almost three years ago we have lowered our coverage ratio by 1.5 turns. Our debt reduction will continue to be a strategic focus as we head into fiscal 2010.

We currently are evaluating our options for refinancing or extending a portion of our long-term debt. Although our term loans don't mature until fiscal 2013 and fiscal 2014, the debt markets have become active again, and it is prudent to evaluate our options. We will continue to keep you posted on our thoughts on refinancing in the months ahead.

Now I will turn it back over to Gary.

Thanks, Mark. In summary, we had a strong year and executed on all of our strategic objectives. We posted positive comps throughout the year, expanded gross margin by 60 basis points and grew GAAP net earnings over 27%. We generated over $200 million in cash from operations and our use of this cash was balanced. We paid down debt while growing the business through organic store growth and acquisitions.

The resiliency of our business model during tough economic times once again played out. Our store traffic increased and gross margins improved. We believe we are well positioned for long-term growth and remain confident we will deliver another year of solid performance in fiscal 2010. Our 2010 strategic priorities remain the same, to grow our store base organically 4% to 5%, when appropriate, make strategic acquisitions, and to continue to deliver our balance sheet. We will also continue to improve margins and increase profitability.

As always, thank you for your interest in Sally Beauty Holdings and we will turn it back to the operator to take your questions.

(Operator Instructions) Our first question comes from the line of Karru Martinson with Deutsche Bank. Please go ahead.

Good morning. When we look out at your acquisitions starting the large one here with Schoeneman Beauty Supply should we expect similar magnitude acquisitions going forward, more of tuck-in variety or how should we look at that?

Karru, this is Gary. Schoeneman was kind of an unusual opportunity. I think as you seen us over the last two or three years, the majority of our acquisitions are small tuck-ins. This qualifies as that because of the geography that it is and the fact that it fits right in from a distribution standpoint and an advertising standpoint with geographies that we were already partly operating in. But the answer to your question is that's probably on the large size of what you will see us do.

Okay. And in terms of the L'Oreal exposure there, what percentage of their business was L'Oreal?

We don't get into percentages. I can tell you that it is less of a percentage than our BSG percentage was three years ago when we had the issue. I will also tell you that we have several significant brands that we will be adding to that distribution. So, we feel if they decide not to continue with us, which obviously is their choice, we will be fine with the additions that we have to make there.

And I guess in that vain how would you look at the relationship with L'Oreal right now.

Well, I think that it is much better than it had been, in the past. Some of the management folks there that, I guess, didn't see eye-to-eye with us are no longer there. But they have a business model that they are pursuing which is more direct control over the salesforce they have in the US. And obviously, they are in the distribution business from the store standpoint. And I don't know - - I don't see anything on the horizon that would keep them or change their mind about that. However, we still do a significant amount of business with them through our stores. I think that they are pleased with that business and what happens in that specific geography remains to be seen.

And where do we stand today in terms of the private label penetration? I'm sorry if you mentioned that and I missed it.

No, we didn't mention it. Now, keep that in mind that is Sally and we were just talking about BSG.

Absolutely.

It is right about 42% where we ended fiscal 2009.

Okay. And just lastly, in terms your comments on the capital structure, what is the goal here, in your mind, as you go down that path?

Well, right now, we're really looking at the markets in terms of how they have improved recently. And we're evaluating whether or not that presents us an opportunity to either refinance or extend a portion of our long-term debt on favorable terms. So we're in an evaluation mode and there is really not a whole lot further from a directional standpoint that we can provide at this point. But certainly we will keep you posted the upcoming months.

Thank you very much, guys.

Our next question is from Grant Jordan with Wells Fargo. Please go ahead.

Good morning, thank you for taking the questions. My first question, maybe you can just give us a little more color on what is going on in the UK and maybe when you expect to see that show some signs of improvement.

Sure, Grant. Actually we saw significant signs of improvement in the fourth quarter there. We finally finished our assisted replenishment rollout in the middle of the summer. We are in the process of - - well, we have actually completed the remerchandising of a lot of our stores over there. And it steadily improved throughout the year somewhere and actually had quite a good fourth quarter.

Okay. Great. Given your success, have you seen any change, just in general, from competition, whether it is specialty or mass? Competitors on the retail side?

Are you talking specifically the UK or in general?

No, just in general.

No, we really have a pretty unique business model that - - I am not sure, first of all, we would have to discuss specifically who we're considering as competitors.

Right.

But a lot of people we would consider as competitors, I don't think want to mess with the niche that we serve, being the professional cosmetologists. I am not sure that they view the overall market there as large enough, or that they are really in a position to carry those brands given that they are professional and we're still a beauty supply first.

Okay. And then, last question, you talked about some of your priorities for 2010. Maybe just give us an idea where you think maybe the biggest potential to either improve revenue or margins as you go into next year.

Well, I hope that we can improve both. As we said when we announced our acquisitions, they are accretive. Obviously we will have a fairly nice top-line improvement given our -organic growth that has been improving all through 2009 plus the acquisitions. And I believe with the plans that we have in place for combining those acquisitions into our operating systems and our way of doing business, we will get some nice synergies out of them.

Great. Thank you very much.

Our next question comes from Emily Shanks with Barclays Capital. Please go ahead.

Good morning, it is Matt [Leach] in for Emily. Thanks for all the color today on the call, guys. Just regarding next year's CapEx plans and store plans. I know you guys did specific spending for CapEx but maybe you could quantify in terms of stores and how many you're looking to open or maybe ballpark it? If any color on that would be great.

We said in our prepared remarks, that we will get back to 4% and 5% organic store openings. Which will be our history up until 2009. A lot of those will be in Europe, this coming year in fiscal 2010.

Okay, great. And then, in regards to the $20 million that you guys paid down on the term loan. Does any of that offset any required amortization in fiscal year 2011 going forward?

Say your question again, I'm sorry?

The $20 million that you paid down on the term loan, that you disclosed you paid down on the term loan, does that offset any required amortization?

It does. It does go against the amortization schedule in terms of when we're required to make another mandatory payment. Right now we're not required to make another mandatory payment on term loans until December of 2010.

However, and just for the benefit of everybody listening is that our leverage ratio is above 4 which means that we're still subject to the excess cash flow test under our existing covenant, agreement. And we approximate that that excess cash flow payment that we will make, which will also be a pre-payment, to be about $22 million that we will make in January of 2010.

Great. That's very helpful. Then my last yes question is I know you guys mentioned in regard to the Schoeneman acquisition, it's on the larger side that you guys would do. In terms of the price that you paid, would you also agree that that's on the middle or high end of what you pay? Going forward, in terms of purchase price multiples, where do you guys look to buy acquisitions out of?

Yes, that is on the high end.

Great thank you very much, guys.

Yes. Thank you.

And our next question is from the line of Linda Bolton-Weiser with Caris. Please go ahead.

Hi, how are you going. Can I ask another question on I guess, well, Sally Beauty? The operating margin of that segment in the quarter, I mean, it was down year-over-year and yet you have been posting pretty good year-over-year improvement in the last couple of quarters. So, is that something related to the UK or is there something else? Was there some high spending in the quarter because I noticed the gross margin was up. So that's good. Could you explain a little more?

Yes, it was really all due to the UK and Europe. We did increase advertising a little bit, but Sally had an excellent quarter that was dampened a bit by the international business.

So is it higher spending to counteract the weak economy or is it spending to get your business back on track?. Can you just elaborate?

It is not that - - no, it is not that at all. It is further spending on our CRM and our Beauty Club Card programs which we have been doing all year. Our advertising for Sally has been up all year and we're going to do it again next year because its working.

Okay, great. So, I mean, I know you don't want to give specific guidance but I mean are we looking for a little bit of overall margin improvement in the Sally store segment next year?

Yes.

Okay. Okay. And, then, can you just say of the 49 BSG stores added in the quarter, how many were from the acquisitions, was it 43 from the Schoeneman acquisition?

43 from the Schoeneman acquisition and 3 from the Belleza acquisition and InterSalon was also in the fourth quarter which was 16.

Okay. And then, I guess you opened 44 Sally Beauty stores in the quarter. That's kind of a high number. Did that - - that didn't include any acquisitions did it?

Yes, it did. It included the InterSalon acquisition, which is the 16 stores.

Oh, 16 stores there. Okay.

Yes, InterSalon was part of Sally. Belleza and Schoeneman were part of the BSG.

Okay got it. And then, is there any way to think about - - I mean do you always open kind of a lot of stores in the fiscal fourth quarter ahead of the Christmas season or is there any seasonality to your plans for store openings. How should we think about that as the year rolls forward.

Keep in mind this year, we deliberately slowed our openings back in December and January because of some concerns on the economy. Which looking back, we probably shouldn't have done. So that made the fourth quarter look a little heavy this year.

But, in general, the fourth quarter is usually a little heavier. And I can't really say it is because of the upcoming holidays. It probably has more to do with just getting leases done throughout the year. And if we are going to close any stores, those often times will happen in the second quarter, which makes the fourth quarter look a little heavier as well.

Okay. And then, can I just finally ask on the franchise business, the BSG franchise business. I know it is a slow process fixing that. But can you just update us on are you 75% through with getting that better? Or 50% through or - - how much more improvement and how long is it going to take?

Well, it is actually showing some very nice improvement now. To give you a percentage of where we are on it, I would say it is between 50% and 75%. It is an ongoing thing as we're trying to improve the quality of some of our franchise owners. We have taken a lot of new brands in there.

We're growing in Mexico nicely with that business. So, I would say between 50% and 75% if you were looking for gauge. And I think throughout fiscal 2010, we will continue to show quarterly improvement there.

And do you have an operating cash flow number for the fiscal year?

For fiscal 2009, our operating cash flow was approximately $223 million.

Great, thank you, I appreciate it.

Thank you, Linda.

Our next question is from Erika Maschmeyer with Robert W. Baird.

Great, thank you so much. Great quarter.

Thank you.

Can you elaborate a bit on traffic and ticket for Sally in the Q4.

Yes, traffic was up. And the average ticket in the quarter was up slightly.

Okay. And then, I guess just to break out for fiscal 2010, your corporate expense guidance. Could you break that out at all in big buckets? Share-based comp versus investments IT international?

Well, as we -- I can give you basically that the share-based compensation is going to go up approximately $1.7 million back to that $10 million range. A lot of that is function on share price when options are exercised. It is fairly mechanical. The overall universe shares issued is pretty static right now. And the remainder is going to be in the shared service line.

And it is a combination, I don't want to get too granule with you, but it will be a combination of some of the IT initiatives that we're doing in terms of enhancing our IT footprint both domestically a well as internationally. And also, if you recall, from earlier calls in the year, since we are anniversarying, merit increases that were delayed, as well as people who received merit increases for fiscal 2010. So you basically get a little bit of a double bump there from that. As well as then receiving increased participation in some of our fringes such as insurance and things like that. That is the overall color behind it.

Great. Could you talk about your plans to expand CRM next year and how that might compare to fiscal 2009 in terms of cost and number of stores in the program?

It shuck very similar to20'09. We added 800 stores in two different tranches in 2009. And we're presently at 1200. And, I believe that we will go to 1600 then eventually 2000 during fiscal 2010.

Great, thanks so much.

Thank you.

And our next question is from Jill Caruthers with Johnson Rice. Please go ahead.

Good morning, if you could please talk a little bit more about fourth quarter EBIT margins at Sally. There they declined and you quoted weakness at the international business. If you could just compare that to last quarter. We did see an improvement and it seems as though the UK business was weaker last quarter and it has improved this quarter. Maybe just a little bit more clarification on the decline that you saw in the fourth quarter.

Sure, Jill. This is mark. There are a couple of things that drove down the overall operating margins. One is that the gross margins on sales over in Europe, were slightly behind expectation. Namely, for a couple of reasons.

One, we had some of the final cleanup work the our restructuring efforts both in the UK as well as with some of our other smaller areas, that we do business in. And also, we were a little bit more promotional than usual, with that pre-sales which also had a bit of a drag on margins. So there is a combination of both margin compression as well for leverage there that brought about some of the shortfall.

Okay. And then your comment of a lot of the organic growth for fiscal 2010 will be international. And I know international business is lower EBIT margin versus your US business, but do you still expect Sally division EBIT to be up year-over-year?

Yes, we do this year, primarily because of improvements in the international business.

Okay. Okay. And then, last question, if you could just quantify some of the acquisitions. I know you made a lot of them in this quarter. How should we look at maybe the drag of the initial addition of these companies and looking out into fiscal 2010.

I don't think you will see much of a drag. The largest one was Schoeneman on the BSG side. BSG's operating margins have improved all year in 2009. A lot of it due to warehouse optimization program which we still have some benefit coming out of that in 2010.

But also, as I said earlier, the Schoeneman acquisition, will roll in accretive. It won't start the first year at the same operating margin that BSG does. But I believe that that drag will be offset by further improvements in the balance of BSG's business. So I am looking for BSG's operating margins, even with the Schoeneman acquisition to improve slightly in 2010.

Appreciate it. Thank you.

(inaudible) with RBC. Please go ahead.

Good morning, everyone thank you. Thank you taking the question. First, just on the acquisitions, I'm sorry if I missed this, but did you disclose how much you paid for the BSG acquisition?

Yes, we did. It was $71 million and we have a tax benefit that present value was equal to $10 million. So, we look at it as $61 million.

Okay. Great. And that was on the last day of the quarter correct? So all of that flows into fiscal year-end in terms of the payment.

That's correct.

Okay. Great. And as you look, I know you mentioned South America as being a priority. Maybe you can give us a sense of your priorities over the next year in terms of acquisitions maybe vis-a-vis regions and what you generally see as the landscape and opportunities out there.

Well, as we have done in the past, we enter into a completely new geography. We generally do it with a relatively small acquisition and then learn the business a little. So, I think you will see in South America that you will - - we have a very small business we acquired in Chile. We will grow that business, monitor that business, get comfortable with the industry in South America. And probably not do a whole lot in 2010 beyond Chile.

We now have a significant business in Europe and we invested heavily this past year in infrastructure. We moved our distribution center in Belgium which we anticipate will eventually handle most, if not all, of western Europe. We invested in people and IT. We will further invest in IT in 2010. And, given that investment, we will be looking to make fold-in acquisitions in Europe, but primarily this year open a lot of stores relative to the size of our base.

Okay. Great. That's very helpful. And I know you just spoke to the CapEx budget in 2010. Do you see that as a good steady state type number or do you see an acceleration as you go forward into 2011?

I think the only slight acceleration that we will begin seeing as we open more stores outside the US is that stores are a little more expensive to open anywhere, really, outside the US. So we're not talking about huge numbers, but as our 4% to 5% growth dictates a few more stores each year, and those stores are a little more expensive to open, we're going to see our new store CapEx drift up slightly.

Okay. Well, thank you very much.

You're welcome.

(Operator Instructions) And we have a follow-up from Karru Martinson with Deutsche bank. Please go ahead.

Thank you. Just in terms of a big picture here, you guys have obviously have navigated this downturn relatively well. I mean, are you seeing the smaller tuck-in, mom-and-pop variety doing similar or are there opportunities for some distressed purchases out there?

Our competitors are still in our industry. S,o as we didn't see the bottom fall out, neither did they, for the most part. And I don't see - - first of all, I don't see a lost large acquisitions that we have an interest in. Number two, one that is out there as Schoeneman did, are, as an example, was not a distressed company by any means. As you can tell from what we paid, it wasn't a fire sale.

So I think that the smaller tuck-ins, in some cases, you can take advantage of an economic situation, but most of these businesses don't have debt. So they are not being pressured from that standpoint. They are small businesses and they are in an industry that doesn't really have a difficult time, in general, the industry with the economic downturn. So, no, I don't think we're going to be out there stealing any huge companies any time soon.

Okay. And in terms of diversion in the industry. How has that trended over the past year?

Actually, I just received the most recent diversion report last week. And for the quarter, which was the September-ending quarter, the diversion industry-wide was down almost 20%. Now I think part of that was driven by these are the higher price point products that get diverted. And the economy, I believe, is having an impact on that.

But I will also tell you that, I think between us, and Regis, we have raised enough hell, so to speak, about diversion that the manufacturers are paying closer attention to it. Those that have coating systems, the systems are working much better. It is much easier for us to track the product. We're actually seeing improvement. Again, I think it will take another year to see how much of that improvement was due to the price-points and the economy versus the actual controls. But I'm encouraged by what I'm seeing.

Thank you very much, guys.

At this time there are no other questions in queue. Please continue.

Thank you operator. In summary, as I said, we had a great year ending with solid financial results and executing on key initiatives positioning us well as we head into fiscal 2010. Thanks again for your interest in Sally Beauty Holdings and we look forward to seeing all of you in the new year.

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